Auditing Accrued Expenses Under Hong Kong Financial Reporting Standards: A Comprehensive Guide for Hong Kong Auditors
Accrued expenses are an essential financial statement line item that requires careful scrutiny during the auditing process. As a Hong Kong auditor, it’s crucial to ensure compliance with the Hong Kong Financial Reporting Standards (HKFRS) and meet the stringent requirements set by the Accounting Financial Reporting Council (AFRC). In this blog post, we will delve into the key considerations when auditing accrued expenses under HKFRS, focusing on risk assessment, internal controls, and audit procedures. Finally, we will introduce our revolutionary Audit Program 3.0 and demonstrate how it can significantly reduce time costs by 99.99% for CPA firms.
1. Assessing Assertion Level Risks, Inherent Risks, and Control Risks
The first step in auditing accrued expenses is to assess the assertion level risks, inherent risks, and control risks associated with this financial statement line item. HKSA 315 (revised) provides guidance on the identification and evaluation of the risks of material misstatement. Auditors need to consider factors such as the complexity of the client’s operations, the accuracy and completeness of the accruals, and the potential for management override.
To justify the risk levels assigned to each type of risk, auditors should document the client’s specific risk factors and the potential impact on the accrued expenses balance. It’s essential to stay informed about the economic and regulatory environment, as changes in these areas could significantly influence the risk assessment.
The following is a sample of illustrative documentation of the risk assessment process extracted directly from our Audit Program 3.0:
“Assertion Level risk assessments for accrued expenses account balance:
Assertion 1: Completeness
Management has represented that expenses incurred related to goods and services received prior to the year end but not yet invoiced by suppliers have been recorded. Any omissions would result in understatement of liabilities. Therefore, completeness risk is assessed as low risk.
Assertion 2: Valuation
Accrued expenses are initially recorded based on estimates of services rendered. Subsequent measurements are adjusted to reflect actual amounts invoiced. Amounts appear reasonable based on the nature of expenses incurred. Therefore, valuation risk is assessed as low risk.
Assertion 3: Obligation
The accrued expenses represent obligations to suppliers of goods and services received prior to the year end. There are no disputes over these obligations. Therefore, obligation risk is assessed at low risk.
Conclusion
Based on the low risk assessments for all relevant assertions, the overall risk for the accrued expenses account balance is assessed as low risk. No significant issues have been identified at the planning stage that would cause the risk level to be higher. However, substantive audit procedures still need to be performed to obtain sufficient audit evidence for the accrued expenses balance.”
2. Understanding the Design and Implementation of Internal Controls
As part of the requirements set forth in HKSA 315 (revised), auditors must gain a deep understanding of the client’s internal controls surrounding accrued expenses. This involves evaluating the design and implementation of control activities, as well as the frequency, type of control, and personnel responsible for each activity.
When documenting internal controls, it’s important to provide a clear, step-by-step description of the business process for accrued expenses. This should include details on the initiation, authorization, and recording of transactions, as well as the periodic review and reconciliation of the accrued expenses balance. Moreover, auditors should scrutinize the segregation of duties and consider how the client’s IT systems and applications contribute to an effective control environment.
3. Designing Audit Responses and Procedures
After identifying and assessing the risks and understanding the client’s internal controls, the next step is to design audit responses that address each assertion level risk. To achieve this, auditors must carefully consider the factors influencing accrued expenses and develop appropriate audit procedures.
In documenting these procedures, it’s crucial to provide a comprehensive explanation of the steps involved, the documents to be checked, and any necessary confirmations or discussions with management. For example, auditors may need to test the accuracy and completeness of the accruals, verify the appropriateness of the estimates used, and assess the reasonableness of management’s assumptions and judgments related to accrued expenses.
The following is a sample of illustrative documentation of the design of audit procedures extracted directly from our Audit Program 3.0:
“Assertion 1: Completeness
Audit Procedure 1: Obtain a listing of accrued expenses from the client and reconcile it to the general ledger.
Audit Procedure 2: Perform analytical procedures to assess the reasonableness of the accrued expenses balance, considering factors such as historical trends, industry data, and economic conditions.
Audit Procedure 3: Review subsequent payments made after the balance sheet date to identify any unrecorded accrued expenses that should have been included in the balance.
Assertion 2: Valuation
Audit Procedure 4: Review a sample of supplier invoices and agreements related to the accrued expenses balances to ensure they are recorded at the correct amounts.
Audit Procedure 5: Obtain confirmation of accrued expense balances from a sample of suppliers and compare the amounts to the client’s records.
Audit Procedure 6: Inspect any adjustments or settlements related to accrued expenses for evidence of a change in the valuation of the balances.
Assertion 3: Accuracy
Audit Procedure 7: Examine a sample of supplier invoices and agreements related to accrued expenses and compare the amounts to the client’s records to ensure they are recorded accurately.
Audit Procedure 8: Review the arithmetic accuracy of the accrued expenses listing by agreeing the total to the general ledger.
Audit Procedure 9: Investigate any significant or unusual variances between the current and prior year’s accrued expenses balances to determine if they are accurate and properly recorded.
Assertion 4: Obligation
Audit Procedure 10: Review a sample of supplier invoices and agreements related to accrued expenses to ensure that they represent valid obligations for the entity to pay for goods or services received.
Audit Procedure 11: Investigate any old or disputed accrued expenses balances to determine if the entity is still obligated to pay for the goods or services received.
Audit Procedure 12: Obtain legal confirmations or correspondence for any legal disputes or contingent liabilities related to accrued expenses to assess if the entity is obligated to pay for the goods or services received.
Conclusion
The described audit procedures have been designed in response to the low risk-level identified for the assertions of Completeness, Valuation, Accuracy, and Obligation related to the account balance of Accrued Expenses. By performing these procedures, we aim to obtain sufficient and appropriate audit evidence to support our conclusion that the Accrued Expenses balance is fairly stated in accordance with the Hong Kong Financial Reporting Standards. As a result of these procedures, the overall risk level for the account balance should be considered Low Risk. This documentation has been prepared in compliance with Hong Kong Standards on Auditing (HKSA) 230 Audit Documentation and HKSA 220 Quality Management for an Audit of Financial Statements.”
Revolutionizing the Audit Process with Audit Program 3.0
Navigating the complexities of auditing accrued expenses under HKFRS can be challenging. However, with our innovative Audit Program 3.0, CPA firms can significantly reduce time costs by 99.99%. Our automated program generates customized, illustrative audit programs, risk assessments, and documentation of internal controls relevant to any client industry and principal activity. By streamlining the audit process, Audit Program 3.0 allows auditors to focus on ensuring the highest level of audit quality and compliance.
In conclusion, auditing accrued expenses under HKFRS requires a thorough understanding of risks, internal controls, and audit procedures. By following the guidelines set out in this blog post, auditors can navigate the intricacies of this financial statement line item and uphold the rigorous standards set by the AFRC. Moreover, with the unparalleled efficiency of Audit Program 3.0, CPA firms can confidently tackle even the most challenging audits and deliver exceptional results.